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Krugman praise and warnings about Brazilian economy excessive optimism

Friday, December 4th 2009 - 08:11 UTC
Full article 3 comments
The Nobel Prize warned of an assets bubble The Nobel Prize warned of an assets bubble

Brazil has had a better performance than other countries during the current financial slowdown but it has become necessary “to closely follow so much optimism”, said Economics Nobel Prize Paul Krugman during a conference in Sao Paulo.

“Brazil is doing fine. It has a good track record but this is not the same as saying that Brazil is going to become a super power overnight, next year. And I believe markets are acting as if this was a divine revelation”, said Krugman.

“Markets are acting a bit out of reality”, he added.

“Current capital inflows into Brazil are creating an asset bubble”, warned Krugman.

In November, foreign investor inflows totaled the equivalent of 542 million US dollars into Brazil's stock market, Bovespa, despite a new 2% tax imposed in October on foreign investments. (Total capital inflows in the first ten months of 2009 have reached over 26 billion USD).

With the tax inflows slowed, but still remained positive as investors positioned for 2010 growth, expected to come in around 5% in Brazil, from zero this year.

So far this year the Bovespa index has soared 83% while the Brazilian currency, the Real has appreciated 26%.

Krugman said the Real was priced “unrealistically” at current levels. The Real has been trading in a range of 1.70 to 1.75 for the last several months.

This will have an effect on Brazil’s foreign trade with an increase in the trade deficit as imports soar, which will have to be covered with the financial inflows, “but this is not a great problem”.

“Basically it has increased risks for the economy, but we are not talking of an apocalypse, we’re not talking of Argentina”, he argued.

Low interest rates in the US, Japan and the European Union have helped fuel a carry-trade, where investors can borrow money at low costs and invest in higher interest rate nations like Brazil.

The benchmark interest rate in Brazil is 8.75% and expected to rise to around 10% in the second half of 2010 as the country's economy heats up and the central bank grapples with possibly higher inflation.

According to Krugmanm, looking into the past it is not so good to be at the focus of the markets because risks can be underestimated and recalled what happened in Mexico, Argentina and South East Asia.

“Furthermore Brazil still has not shown it will be a fast growing economy”, underlined Krugman.

However in spite of his cautious comments the Nobel Prize praised the performance of Brazil during the current global recession, only possible because of the “excellent fundamentals” patiently built in previous years and the anti cyclical policies.

Krugman was not optimistic about the US economy. “Growth in 2010 won’t be above 2% and a anaemic job market would most likely result in near 0% interest rates for the next two years”.

Categories: Economy, Brazil.

Top Comments

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  • Bubba

    Lula did not dismantle the previous administrations economic policies, which has led to sustainable growth, however, irrational exuberance over this growth in a highly subsidized economy will eventually turn down and go deeper than the current recession.

    Dec 04th, 2009 - 01:25 pm 0
  • h.

    <current capital inflows into Brazil are creating asset bubble>NOT TRUE !
    here is no USA ! you can make <entry-exit> in Bovesba fairly but can not into the rest of System..would not be lucrative !
    <Real level is not realistic> TRUE ! but should be on present levels to balance of other inner factors. Interest Rates levels not so important ..anyway the System does not use up --8-9%-- levels.!
    Brazilian Economy's behaviour is..slow..high..mildly..financing !!

    Dec 05th, 2009 - 03:23 am 0
  • Nicholas

    “irrational exuberance over this growth in a highly subsidized economy will eventually turn down and go deeper than the current recession.”
    What? Mr. Buba, if you did our homework you would understand yourself better that you're talking about Argentina, and not about Brazil as you wished. Guess what, Brazil ain't Argentina who is way way way behind A Brazilian government who has it's books and house in order, something that Argentina and even the US fails to do.
    “Brazil still has not shown it will be a fast growing economy”
    And perhaps that's for the best. The faster you grow, the harder you “can” crash when it goes wrong.
    “current capital inflows into Brazil are creating asset bubble”.
    I agree with you 2 h that it's not true, because most investors have more confidence in the Brazilian economy and fiscal policy than the American economy, government and it's fiscal policy. That's the main fundamental that they are investing in Brazil, long term.
    “Real level is not realistic”
    Actually nobody knows what is a true realistic level, neither Krugman, but again the real is high because of speculation ( can be bad), strong confidence by long term domestic and foreign investors in the Brazilian economy in the long term by doing what is suppose to do. I do think that between the 2-3 real for a dollar is much better for the Brazilian exports what creates more wealth. Brazil is definitely the place to be for long term and will become stronger, though it has a long way to go, what is not bad either. Point is, it's on the right track.

    Dec 05th, 2009 - 01:58 pm 0
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